Executive Briefings

Is China the Next Rust Belt? Not So Fast.

By: strategy + business 03.11.2013

According to a growing number of media and analyst reports, China's days as the world's largest manufacturing nation are already numbered - only two years after ending the United States' 110-year reign. This conclusion has left Chinese business leaders understandably concerned.

At last year's World Economic Forum in Tianjin, the chairman of one of China's largest firms spoke (off the record) of the worst manufacturing crisis in the country's history. Labor costs are on the rise, the demographic dividend is dissipating, and rising oil prices are making long-distance transportation costs to China's major export markets in the U.S. and Europe unsustainable. At the same time, U.S. firms are developing a new respect for the art of manufacturing, and breakthroughs in shale gas conversion have significantly lowered the costs of operating plants domestically. As a result, Gordon Chang wrote in a recent Forbes article, China may soon replace Detroit as the world's rust belt.

That may be an overreaction"”the future of manufacturing in China has more room for opportunity than many Western pundits would like to believe. For starters, although rising labor costs will indeed undermine China's export-led development model, they are also a natural byproduct of the country's economic success, and, therefore, to be celebrated. And there are at least five other factors that will likely more than offset the impact of China's eroding labor cost advantage.

At last year's World Economic Forum in Tianjin, the chairman of one of China's largest firms spoke (off the record) of the worst manufacturing crisis in the country's history. Labor costs are on the rise, the demographic dividend is dissipating, and rising oil prices are making long-distance transportation costs to China's major export markets in the U.S. and Europe unsustainable. At the same time, U.S. firms are developing a new respect for the art of manufacturing, and breakthroughs in shale gas conversion have significantly lowered the costs of operating plants domestically. As a result, Gordon Chang wrote in a recent Forbes article, China may soon replace Detroit as the world's rust belt.

That may be an overreaction"”the future of manufacturing in China has more room for opportunity than many Western pundits would like to believe. For starters, although rising labor costs will indeed undermine China's export-led development model, they are also a natural byproduct of the country's economic success, and, therefore, to be celebrated. And there are at least five other factors that will likely more than offset the impact of China's eroding labor cost advantage.